Sunday, December 27, 2009

Chinese yuan appreciation unlikely

The Financial Times quotes Chinese Premier Wen Jiabao as saying: ”We will not yield to any pressure of any form forcing us to appreciate. ... The purpose [of these calls for appreciation] is to hold back China’s development."

Nice way to end the year on what may be one of the most important issues for 2010. The global imbalance problem is real and not just a Chimerica problem. The current account has deficit has declined dramatically over the last two year, but the structural reasons for the deficit have not changed.

The relatively cheap yuan affects all trade. Asian competitors have to respond by controlling their currencies. The rest of the world has to deal with China trade. The yuan pressure also is tied to issues of domestic growth in China. The Chinese money supply has slowed and is expected to be below the double digit, close to 30%, rate of 2009. This will slow the asset price bubble in the country but also will slow domestic consumption which is necessary to help world growth.

Regardless of what is said by the premier, the yuan diection will still be a key topic for 2010.

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